Why should I invest for retirement?

At Just Futures, we see two main reasons why you should invest for retirement. You might be familiar with one of them, but the second reason is less widely known.

Reason 1: Everyone deserves to enjoy retirement.

We consider enjoying a dignified retirement to be a basic right. Unfortunately, though, in the United States, we don’t have systems that adequately provide the financial security that every person deserves. You may be thinking, “But I have other financial goals I’d like to save for.” Of course, many expenses may be more immediate priorities. But we encourage our clients to consider one fact that is easy to overlook: you can borrow money for most life expenses, but banks typically will not lend you money to fund everyday retirement expenses.

Reason 2: Investing for retirement can help you build wealth, even if you don’t come from money.

You may have heard or participated in conversations about equity in the workplace. Often, such discussions focus on salary. Wage equity is important: research shows that, on average people of color earn less income than their white peers, and non-males earn less than their male counterparts.

But did you know that the racial wealth gap is three times larger than the racial income gap? How did that happen? The conversation often focuses on home ownership and how discrimination blocks Black and brown communities from fair housing. According to the U.S. Census Bureau, home equity does make up a big part of U.S. household wealth (28.5%), but, out of all asset types, retirement investments are the largest portion. U.S. households have, on average, 34.1% of their wealth in retirement accounts. Further, a Brookings study found that from 1989 to 2022, “The largest disparity in wealth growth was in stock equity, which made up nearly 30% of white wealth but only 4% of Black wealth.”

How are retirement investments such a driver of wealth and wealth inequality? The answer is largely connected to compounding growth. Some people are fortunate to have discretionary income (money left over after paying for necessities like rent, medical bills, and food) which they can invest through an account – say, a 401(k), 403(b), or individual retirement account (IRA) – and leave it there for decades. The money they invest earns a “return.” This return can be interest, dividends, or the value of the assets increasing. By leaving those gains in the account, the investors are reinvesting those returns. Then the cycle continues, with investors reinvesting those returns. And so on. In this way, typically, over the long term, compounding results in the exponential growth of assets in an account.

The power of compounding

Source: Vestwell

The chart above shows how compounding – growth that an investor gets from reinvesting returns over the long term – can turn one extra dollar of income into exponentially more than one extra dollar of wealth. Someone who is fortunate to be able to invest $200 per month for 40 years ends up investing $96,000. That’s the blue part of the bars, called the “principal.” Meanwhile, this principal earns returns, which the person continuously reinvests. This reinvested amount – the gold part of the bars – may grow exponentially. And the person ends up with $528,025. That is more than five times the amount they put in!

So, someone who earns more income, who is more likely to have some extra money to put into an investment account, ends up with much more than just the higher income. They build wealth in a way that people with lower incomes typically cannot. And this difference in wealth grows faster than the difference in income.*

The main point is: if you do not come from wealth, but you are able to put some money, even a little bit, into a retirement account, you could start to build wealth. The money you invest could grow exponentially over time. And if your employer offers a matching contribution, then for every dollar you invest, you get even more put toward your retirement nest egg, up to the matching limit.**

To be clear, we at Just Futures strongly believe that you as an individual should not bear the responsibility of closing racial and gender wealth gaps. These inequalities are systemic. For this reason, in addition to providing financial education to individuals, Just Futures educates employers about how to provide more equitable retirement benefits. And we participate in advocacy – like more equitable tax laws – to improve system-wide structures, too. Check out Just Futures Impact’s report Reclaiming Retirement for All for more on how we – at individual, organizational, and the sector levels – can use retirement investing as an intervention against wealth gaps.

Hungry for more knowledge? Read on to learn about how to decide between a Roth or pre-tax account.

If you don’t have a retirement investing account, or if your employer contracts with a different retirement plan administrator, we’d love to show you the advantages we at Just Futures can offer! Contact us: info@justfutures.com.

~Lisa, Manager of Coalitions and Worker Power

*Other factors – like having friends or family who can lend you money if you have a financial emergency, or financial institutions offering white lenders better loan terms, etc. – contribute to racial wealth gaps as well.

**Any contributions you make to your 401(k)/403(b) are yours. However, depending on your employer plan’s vesting schedule, the matching contribution from your employer may not be yours unless you meet the requirements. Some vesting schedules require you to stay at your job for a predetermined amount of time before the employer match is yours to keep. For example, you might be entitled to 100% of an employer match if you've stayed 3 years, but none if you leave before then. Another variation of a vesting schedule is earning 20% of an employer match for every year you stay, so you receive 100% of the match once you've stayed for 5 years. Check your plan's rules if you're thinking of changing jobs.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind.

The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Just Futures explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors.

Investing involves the risk of loss that clients should be prepared to bear. No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that your investment will be profitable. Past performance is not a guide to future performance. The value of investments, as well any investment income, is not guaranteed and can fluctuate based on market conditions.

Published March 5, 2025